Supreme Court revises restrictive covenant test

In my summary of the hot employment law topics for the year (Journal, February 2019, 29), I mentioned that the case of Tillman v Egon Zehnder Ltd was heading to the Supreme Court, the Court of Appeal having found a six-month non-compete restrictive covenant to be invalid. The Supreme Court has now handed down this much-anticipated ruling. The main issue before the court was whether words could be severed from a post-termination restrictive covenant in order to render it enforceable and not invalid as an unreasonable restraint of trade. 

Protecting business interests 

Mary-Caroline Tillman was employed as Joint Global Head of the Financial Services Practice Group by Egon Zehnder Ltd, a specialist executive search and recruitment business. 

In accordance with her employment contract, she was bound by various restrictive covenants, including the non-compete which stated that, for six months following the termination of her employment, she could not “directly or indirectly engage or be concerned or interested in any business carried on in competition with any of the businesses of the Company or any Group Company”. Unusually, there was no exception for small shareholdings.

In January 2017, Tillman resigned and her employment came to an end on 30 January. She informed the company that she intended to work for a competitor from 1 May 2017, i.e. before the non-compete would expire on 30 July 2017. Tillman said she would comply with all her restrictions except the non-compete, which she said was too wide to be enforceable. The company sought an injunction to prevent her from breaching the non-compete and this was granted by the High Court. Tillman appealed to the Court of Appeal on the basis that the words “interested in” effectively prevented her from holding even a minority shareholding in a competing business and went beyond protecting the company’s business interests, rendering the clause unenforceable. She was successful and the company appealed to the Supreme Court.

The Supreme Court held that the words “interested in” did prevent Ms Tillman from holding even a minor shareholding in a competitor and therefore did go further than necessary to protect the company’s business interests. Accordingly, they were not enforceable. However, the court went on to say that these words could be severed from the restriction, enabling the company to enforce the rest of it.

Three-pronged test

The Supreme Court overruled the longstanding decision in Attwood v Lamont [1920] 3 KB 751 which had held that, to sever words from a restriction, they had to be independent and merely technical or trivial. Instead, the court relied on the three-pronged test in Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613:

The unenforceable provision must be capable of removal without adding to or amending the remaining wording (the blue pencil test). Here, the words “or interested” were capable of being removed from the non-compete without the need to add to or amend the wording of the rest of the restriction.

The remaining terms must continue to be supported by adequate consideration. This would not usually be an issue where the individual had recently been employed under the contract.

The removal of the provision must not change the character of the contract in such a way that it becomes “not the sort of contract that the parties entered at all”. This will always be for the employer to establish. In this case the removal of the prohibition on Tillman being “interested” did not generate a major change to the restraints.

The tests were therefore met and whilst the contractual period of the restraints had long expired, the Supreme Court ordered that the injunction be restored and the words “or interested” be deleted from the non-compete.

Whilst this decision will clearly be reassuring to employer clients, it should not be taken as a carte blanche to include unnecessarily restrictive wording in post-termination restraints.

When drafting restrictive covenants, it is essential to draft them carefully, taking into account the role and seniority of the employee who will be bound by them and the extent to which the employer actually needs protection. Where there is a less restrictive way of protecting the company’s business interests, that option should be adopted.

Interdict proceedings are notoriously expensive and going through them may be a bitter pill for a client to swallow to protect their business interests for the relatively short span of a usual restriction.